WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 11-06-02:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw
Position overview . . .
Our October 11th newsletter forecast that the DOW would have a large trading range between 8,650 and 7,130. We also issued a market alert on October 17th declaring that the DOW had topped at 8,318. The initial newsletter projection proved to be more accurate than the market alert in terms of the DOWs trading range top, but the market alert was extremely accurate in timing the bottom for the US treasuries. During the course of the month, the DOW traded with an intraday high and low between 8,558 and 7,197. Profits were generated as the DOW performed another bear market rally from the low of DOW 7,197 which was close to our projection of 7,130. The main purpose for the market alert was to reestablish a large position in the various US treasuries with the expectation of a strong rally in note and bond prices and a decline in the various stock indices during the remainder of the month.
Our conservative trading model, which only trades the US treasury equivalent in the futures/derivatives market, outperformed the standard trading model that trades in the various US stock indices, foreign currencies and US treasuries. This above normal performance occurred as the stock market did rally as expected from 7,197, but did not decline after the market alert was issued at DOW 8,318. However, the US treasuries did rally substantially as projected in the alert.
Looking forward . . .
The mutual-fund managers still do not believe that we are in a bear market. With only 4.7% in cash, they are unprepared for any high-volume liquidation by investors. In deed, they have remained nearly fully invested throughout the current 2 1/2 year decline. This number will have to rise to more than 10% to 15%, based upon history, before the bear market is over. A panic to get liquid could develop if the market drops on rising volume. It is possible, when everyone who wants to sell, sells, the market can rise. Remember the crash of 1987? That was a cyclical bear market in the 17-year bull market. It goes both ways. Any bull market that now develops is likely to be a cyclical bull in the long-term secular bear market.
The economy is once again tipping into a recession. This recession could be quite severe. Deflation forces may even accompany this recession. The Federal Reserve may not have enough ammunition in its arsenal to prevent this developing recession. The props that have supported this economy are disappearing. Retail sales have been slipping. Even the retail leaders like Kohl’s and Walmart have reported disappointing sales. Auto sales are no longer responding to 0% financing. Home sales have been very strong until recently. However, over the last three months, home sales have declined back to the average level of the last few years despite falling interest rates. The housing industry has lost steam along with most of the economy. Interest-rate changes typically lead home sales by four to six months. This year rates have declined for seven consecutive months, yet home sales are now flattening. Weakness is areas that are interest-sensitive suggests that the 125 basis points (1.25%) of easing that the FED still has available may not be sufficient to turn the economy upward should a recession unfold. An overall reading of commodity prices suggests that further economic weakening is ahead. Lumber prices, an indicator of future housing demands for example, have been weakening since May 2002.
Our wave pattern technical analysis is anticipating, during the month of November, a trading range for the DOW between 8,835 and 7,775. The US dollar has resumed its bearish trend due to the continued decline in consumer confidence, terrorism threats and the large trade deficit imbalance. This deficit trade balance still equals remains at nearly 5% of our US Gross Domestic Product (GDP) and will only narrow with a decline in the US dollar. Even with the Fed Funds rate being cut by 50 basis points today (1/2 percentage point), we still feel that US treasuries will outperform the various stock indices, and therefore will remain with a large allocations in the various US treasuries.
A footnote to our readers, there will be no December 2002 newsletter as in years past. Our January 2003 newsletter will provide our market conclusions for the year 2002 along with our outlook for the year ahead, 2003.
We repositioned back into the various US treasuries, in our October 17th market alert, and will, maintain this large allocation. The various US stock indices are still vulnerable to another bear market decline with the fundamental event(s) and/or reasons justifying the next market selloff. We further reduce the suggested allocation into the Inflation-Protection Index bonds (TIPS) to emphasize the bullish position with regard to the US treasury notes & bonds. We also are suggesting a larger allocation into the futures/derivatives market for its flexibility in capturing profits within a bull or bear market as offer through our private account management services. We are suggesting the following investment allocations:
1) A 45% to 50% allocation into 2 to 5 year maturity of US Government bonds;
2) A 5% allocations into 20 to 30 year zero coupon bonds commonly referred to as STRIPS;
3) A 15% allocation into inflation-protection index bonds (TIPS). If the US treasury prices decline, this instrument will effectively generate profits as investors reposition out of bonds and back into stocks. This is far more a conservative investment vehicle than stocks or equity mutual funds and provides an effective 3.5% yield and possible price appreciation if the bond market declines.;
4) 0% in individual growth stocks or large cap mutual funds due to their limited price appreciation potential and a low dividend yield with many providing none at all;
5) 15%-20% in cash, Treasury bills, CDs or money market funds with short maturities which will allow investors to rollover these instruments and obtain a higher level of return as interest rates move higher.;
6) 20%-25% in the futures/derivatives markets (Note: This will help provide investors a means to hedge as well a further diversify their investment portfolio during either a bull or bear market as offered in our private account management services).
If there are any questions regarding the information discussed within this market alert or our private account management services, please call the number provided below or e-mail us and we would be willing to provide further clarification.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400